Now Wal-Mart is selling cheap gas!!

Alex Tabarrok at Marginal Revolution has a post showing that Minnesota and Maryland have enacted minimum price laws for gasoline, and are enforcing them against gas stations that are charging too low a price per gallon or are offering free coffee with gasoline as an inducement. In the case of Minnesota, many of the gas ...

By Daniel W. Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

June 6, 2004, 3:36 AM

Alex Tabarrok at Marginal Revolution has a post showing that Minnesota and Maryland have enacted minimum price laws for gasoline, and are enforcing them against gas stations that are charging too low a price per gallon or are offering free coffee with gasoline as an inducement. In the case of Minnesota, many of the gas stations are attached to Wal-Marts. This got the attention of Brad DeLong, who agrees with Tabarrok. Brad has an excellent rebuttal to claims that Wal-Mart-type organizations merely undercut prices to create exploitable monopolies for the future, a la Microsoft:

Suppose it sells gasoline cheap, wipes out all competitors in the area, and then raises prices to $12 a gallon. What happens then? Well, the underground storage tanks of its defunct competitors are still there. Gas pumps are cheap. $12 a gallon is a lot of money. You get lots of new entrants taking over the locations of the old gas stations, and competing with Walmart. If Walmart wants to maintain its monopoly, it must limit price to make new entry unprofitable. And since new entry is easy and cheap–since the market is contestable–the limit price is not that high above the competitive price. Walmart cannot acquire a monopoly by underpricing–“predatory pricing,” it is called–without giving a large present to consumers. And the contestability of the market means that it cannot take that present back once it has acquired a monopoly. Few industries have cost structures such that attempts at monopolization through “predatory pricing” harm consumers. Even in the case of Microsoft, it is not clear that Microsoft’s success was bad for users: users got a lot of pretty good software cheap for quite a while, and even those who (like me) are Apple customers found the prices of our software reduced by competitive pressure from Microsoft. I think Microsoft’s success was (probably) bad for consumers, but it is definitely an issue to be debated.

Readers familiar with danieldrezner.com’s position on Wal-Mart will chuckle at the last paragraph in DeLong’s post:

You can claim that minimum-gasoline-price laws are bad because independent gas station owners are morally worthy people, the salt of the earth, the backbone of America, and they deserve to have the power of the state deployed to protect them and their livelihoods against the amoral efficiency calculus of the market. I will laugh at you if you do, but you can make that claim. You cannot make the uninformed and ignorant claim that minimum-gasoline-price laws actually lower the long-run price of gasoline by “protecting” us from rampant monopoly–unless you have some reason to believe that gas stations are not part of a contestable market.

Let me hear you say, “Amen!”

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

Tag: Economics